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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Remarks at the CCOutreach National Seminar


Chairman Mary L. Schapiro

U.S. Securities and Exchange Commission

SEC Headquarters
Washington, D.C.
January 26, 2010

Good morning. I am so pleased to be here with you today. It is encouraging to see such a large number of Compliance Officers with us and to know that we have thousands more viewing online.

I am also very pleased that shortly you will have the chance to meet our new Director of OCIE, Carlo DiFlorio. Carlo joins us from PricewaterhouseCoopers where he was a partner in the Financial Services Regulatory Practice. He also was one of their national leaders in corporate governance, enterprise risk management and regulatory compliance and ethics. Of course, since he has been here for only 24 hours, I ask that you go easy on him.

The Role of the Compliance Professional

The role of compliance professionals is critical to the protection of investors and the functioning of our markets.

As one of the first lines of defense against impropriety, your work reinforces our investor protection mission. In your role, you have the obligation to provide investors with an added measure of security above and beyond that which a regulator provides.

But you succeed only if you understand the rules yourselves. Only if you approach your role with sufficient skepticism. And, only if you act diligently to root out wrongdoing and remain steadfast in your commitment to investors.

Our system values your role, in part, because the SEC, as you all know, is a relatively small agency. We are charged with regulating over 11,000 investment advisers, approximately 8,000 mutual funds, and nearly 5,000 broker-dealers, among others. And yet we have fewer resources than we had just five years ago — and a market that has grown exponentially over time.

That is just one reason why we have been seeking ways to leverage third parties to assist us in our core mission of protecting investors.

For instance, we recently adopted a rule that leverages independent accountants to perform asset verification and custody control reviews to better protect advisory clients. We recently established a new process to encourage corporate insiders to cooperate in our enforcement matters. And, we have been pushing for legislation that will enable us to compensate whistleblowers who provide us with actionable information.

But, the work of chief compliance officers like yourselves should have the most meaningful impact.

For it is you who are on the front lines making sure your firms are complying with the law, the rules and the guidance we offer. It is you who are on the ground alerting colleagues to avoid conflicts of interest, and ensuring that your firms are providing clear, simple and meaningful disclosure. And, it is you who can prevent problems before they ever emerge.

Harmonizing the Program

Last January when I arrived at the agency, one of my first public tasks as Chairman was to welcome CCOs to our national seminar for broker-dealers. Today, as one of the last tasks in my first year, I have the honor of participating in this first joint seminar for compliance officers — not just of broker-dealers, but of investment advisers and investment companies as well.

Moving toward this harmonized Broker Dealer/Investment Adviser approach in thinking about compliance makes sense. And it matches our own efforts to further harmonize how we conduct our exams.

After all, when we send an examiner into a firm, it shouldn't matter whether that firm has "investment adviser," "broker-dealer" or any other title on its nameplate. All that should matter is that the examiner has the right skills sets to do the job.

Indeed many investors we serve do not know the difference between an investment adviser and a broker-dealer. The services are often indistinguishable from an investor's perspective. They just want to know that they are getting a fair deal from the securities professionals they turn to for advice.

That is why I support a common fiduciary standard of conduct for investment advisers and broker-dealers that is at least as strong as the fiduciary duty recognized under the Investment Advisers Act. And in the spirit of regulating similar services under similar standards, I believe that securities professionals, whether broker-dealers or investment advisers, should be subject to equivalent regulatory requirements.

One reason for this focus on equivalent standards, and for our joint National Seminar today, is that firms are changing. In many cases, there has been a merging of the broker-dealer and investment adviser industries.

Today, an increasing number of firms registered with the SEC are either dually registered as broker-dealers and investment advisers, or have affiliates that represent each type of firm. As a result, we have begun much greater collaboration between the broker-dealer and adviser examination programs, resulting in successes at uncovering wrongdoing and determining the full nature and extent of fraudulent schemes.

We have recently brought a host of investment adviser and broker-dealer enforcement actions. Those actions have involved such things as failure to disclose material conflicts of interest; Ponzi schemes; fraudulent investment schemes; illicit trading on behalf of customers; insider trading; and improper valuation of client accounts — to name just a few.

As Carlo, our new OCIE Director, sets out to enhance the effectiveness of our examination program, I know he will think about ways we can better integrate our examinations of investment advisers, broker-dealers and mutual funds.

Meanwhile, it is important that firm compliance programs evolve as well, to reflect the current business and organizational structure at a firm. And, those programs must keep pace with regulatory developments, market changes, and industry practices.

At the same time, it is up to you to evaluate the impact such developments or changes may have on compliance at your firms. It is up to you to communicate developments regularly to firm business units. And robust compliance must include regular review for conflicts that exist as a result of tangential business lines, affiliated entities, or products or services sold.

Human Intelligence

In addition to greater collaboration at the SEC, we are also focused on increasing investment in "human intelligence" — both in seeking staff with expertise in particular areas and in bolstering our training programs.

As you know, the financial markets and complexity of products have evolved significantly over the past several years. And we are taking steps to ensure that SEC staff is well equipped with the necessary tools. For instance:

  • We are moving quickly to hire industry specialists with additional expertise so we can better keep pace with the rapidly evolving markets we regulate.
  • We are making sure our examiners are receiving regular and relevant training — with more than 300 becoming certified fraud examiners last year alone.
  • And, we are seeking input from staff with expertise in areas where risk-targeted examination sweeps might uncover fraudulent acts — or might provide valuable insight on strong compliance practices.

Indeed, one of the examination sweeps the staff is currently conducting targets more than 50 registrants across the U.S. and the UK. The sweep focuses on the manner in which investment advisers that manage CDOs, hedge funds and other vehicles that hold asset-backed securities and other structured products have managed those assets under the ongoing stresses of the credit market.

While we have accomplished much over the last year, we have much more work ahead. And, just as we have been thinking hard at the SEC about how we can better protect investors, this is an ideal time for you all to be doing the same kind of critical self-assessment of your role.

In particular, it is critical that you, as compliance professionals, understand your firm and who it serves. You need to know its clients and its investment strategies. You need to know your firm's employees, including whether they are in over their heads. And, you need to know your firm's business partners, including custodians, administrators and prime brokers, as well as how they are selected.

Ask yourself whether you know who your firm trades with and what your counterparty risk is. And, give careful thought to how the money moves at your firm, including potential conflicts and the effect of compensation on decision-making.

And, finally, are you regularly reviewing communications involving employees and officers to ensure everyone is following the rules?

Together, if we continue our work to implement effective regulations and compliance programs, we can prevent fraudulent schemes from occurring, detect instances of non-compliance sooner before investors are harmed, and promptly correct problems that do occur.

In closing, I would like to take a brief moment to thank our fellow regulator, FINRA, and the other CCO panelists for participating in today's event. I would also like to thank you for joining us today, and thank you for your continued commitment to serving investors.

I hope today's discussions provide you with practical, real-world insights that you can incorporate to better serve the investors we are jointly seeking to protect.

Now I'd like to turn it over to Carlo DiFlorio — our new OCIE director. In the short time since Carlo accepted our offer, he has already exhibited enormous energy, enthusiasm and creativity toward his new role. I have every bit of confidence that, in this challenging environment, Carlo will more than ably shepherd the many reforms going on and those yet to come. Please join me in welcoming Carlo as the new Director of OCIE.


Modified: 01/26/2010